Positive Japanese corporate bond yield outlook under Abenomics

Manulife Asset Management has released Abenomics: Implications for credit strategy in a Japan fixed income context. The report, the third in a series examining the effect of the Abe administration’s strategy to revive Japan’s economy, finds continued implementation of unprecedented monetary easing should keep Japanese corporate bond yields stable in the medium term.

Commenting on the findings, Keisuke Tsumoto, head of fixed income investment for Manulife Asset Management Japan, said: “Our analysis reveals a cautiously optimistic outlook for investment in Japanese credit. We find that continued quantitative easing (QE) under Abenomics has driven interest rates down to a point where there is a relatively high spread between corporate return on assets and the cost of debt. We expect this to remain the case as long as QE continues, creating a strong incentive for companies to invest in their operations, driving economic growth and contributing to higher inflation.

“Against this backdrop, credit spreads are currently at their narrowest point since the March 2011 earthquake and tsunami. Given the likelihood of continued accommodative monetary policy as the government pursues its inflation target of 2%, we see the credit spread remaining at this level over the next six months or so, creating a generally stable environment for credit investment.”

The key risk highlighted in the report is that low interest rates could lead companies to overleverage, setting the stage for rapid credit spread widening in the event of a financial recession or sudden tightening of monetary policy.

However, Mr. Tsumoto explained: “We do not see this as a major concern over the coming six months as global macroeconomic conditions are generally supportive and Abenomics has not yet achieved its inflation target. Under these conditions we are particularly constructive on Japanese credit in sectors such as electric utilities, financial services, real estate, telecommunications and electronics. We are also positive on select high-yield bonds.”

The first report in the series, Theoutlook for Abenomics: Implications for financial markets, was released soon after the policy was unveiled. It provided a comprehensive introduction to the “three arrows” of Abenomics – effective monetary policy, bold fiscal policy and growth strategies – and undertook a detailed scenario analysis of possible outcomes for the Japanese economy and financial markets, including salient risk factors.

The second report, Abenomics: Implications for interest rate strategy in a Japan fixed income context, followed the one-year anniversary of the policy. It examined the effect of Abenomics on the Japanese government bond (JGB) market. The report found that Abenomics had already made significant progress stimulating economic growth and combatting deflation in Japan. It foresaw continued downward pressure on JGB yields via QE and the introduction of forward guidance and looked ahead to possible outcomes for the asset class in 2014.